Under terms of the $675 million settlement reached between New York Attorney General Eliot Spitzer’s office, US Securities and Exchange Commission (SEC) and Bank of America and its merging partner FleetBoston Financial Corp, the firm said it would use its “best efforts” to persuade eight of the 10 Nations Funds directors to leave the board by May 1, 2005, as punishment for their alleged role in letting a hedge fund make improper short-term trades in international funds (SeeBofA, Fleet Come to Terms with Spitzer, SEC in Fund Probe ) . Other terms of the deal included getting out of the securities-clearing business, reductions in mutual fund fees, and remuneration to investors harmed by the illicit market timing deals, according to a Boston Globe report.
The trustees of Nations Funds disagree with the settlements stipulations and feel as though they acted within the guidelines of their fiduciary terms. The question now turns to the trustees’ options in the matter.
Current SEC regulations provide that independent fund trustees set governance rules for the mutual funds they oversee. In fact, the company operating the mutual funds – Bank of America in the current situation – cannot dictate governance rules to the board. Rather, the trustees have the power to fire Bank of America’s Nations Funds as the manager of the funds.
This runs contrary to the terms of the settlement reached between Bank of America and regulators. In the settlement, the bank agreed to encourage the board to adopt various new governance rules, including a 10-year term limit, which would lead most of the trustees to retire by next year. The regulators said they agreed to the measure, so long as the term limit would force the resignation of the eight board members who signed off on a waiver in 2002 to permit a hedge fund to market time the funds.
The Bank of America-FleetBoston settlement is the fourth thus far in the mutual-fund probe that came to light last September. Other settlements announced to date include MFS (See MFS Scandal Settlement Finalized), Alliance (See Alliance, Regulators Reach Settlement), and Putnam (See Putnam, SEC Reach Securities Fraud Settlement ).
While Nations Funds was never charged with any wrongdoing, it was one of the first fund companies implicated in the scandal that erupted when Spitzer uncovered preferential market-timing arrangements between the hedge fund Canary Capital Partners and a number of fund operations, including Nations (See Spitzer Fund Abuse Probe Pumps Out More Subpoenas ). According to the attorney general’s September complaint against Canary, which resulted in a $40 million settlement with the hedge fund, Nations International Equity was one of the funds Nations gave Canary the green light to market time.